Electronic archivist EMC (NYSE:EMC) reports Q3 2006 earnings results bright and early Tuesday morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

  • Buy, sell, or waffle? There are 27 analysts following EMC, and their votes are split 2-to-1 in favor of buying rather than holding.
  • Revenues. On average, they're looking for 13% sales growth and $2.7 billion in revenue.
  • Earnings. But they also expect a penny's decline in profits to $0.12 per share.

What management says:
Last quarter, in missing the bar by a mere penny, EMC broke a five-and-a-half-year-long streak of meeting or beating Wall Street earnings guidance. CEO Joe Tucci's assessment of the quarter was mixed; he said business remained strong, as did customer demand, but he also said that "execution was not up to our own high standards."

What management does:
Those standards look high indeed, judging from the margin table below. Over the past six months, EMC has grown its revenues 12% year over year, while cost of goods sold grew 11%, and selling, general, and administrative costs (SG&A) matched the sales growth rate of 12%. This essentially "par" performance handed the firm its first decline in rolling gross and operating margins in at least 18 months. (Net margins have been falling for three straight quarters, granted, but this is due to currency exchange rate fluctuations and a series of restructuring charges.)

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

51.8

52.5

53.1

53.7

53.9

53.8

Op.

14.3

15.0

15.6

16.4

16.7

16.4

Net

11.6

12.3

14.0

11.7

11.4

11.0
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Last month, management announced that it had completed its acquisition of "online identity and digital asset manager" RSA Security -- a $2.1 billion deal that some Fools characterized as being too expensive, while others argued it was "critical" to "EMC's long-term growth."

Rather than rehash the debate between our Fools over how much EMC spent on RSA, though, I'd like to move on to a different subject: how much EMC is spending on itself, or, more specifically, on the research and development necessary to keep the cutting edge of its high-tech products finely honed. Over the past six months, R&D expenditures notably lagged the firm's sales growth rate; they grew just 9%, versus 12% for sales.

As Tucci himself said in describing the strength of the businesses, the "performance of our newer software businesses [has been] driven by the technology and people that have joined EMC through acquisition." Good to hear -- but technology is a constantly evolving animal. To keep "driving" performance, it needs to be kept fresh. In next week's news, therefore, what I'd really like to see is for sales to continue growing at a brisk clip -- but if operating costs continue to keep pace with that clip, I'd much prefer to see the SG&A component slow down and R&D spending ramp back up.

Competitors:

  • Hewlett-Packard (NYSE:HPQ)
  • Hitachi (NYSE:HIT)
  • IBM (NYSE:IBM)
  • Network Appliance (NASDAQ:NTAP)
  • Oracle (NASDAQ:ORCL)
  • Sun Microsystems (NASDAQ:SUNW)

Get the Fool skinny on the RSA deal in:

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Fool contributorRich Smithdoes not own shares of any company named above. The Fool has a disclosure policy.